Aggregate Supply

Long Run vs Short Run

Long run:

•  period of time where input prices are completely flexible and adjust to charges in price level

In the long run, the level of Real GDP supplied is independent of price level
Short Run :

• Period of time where input prices are sticky and do mot adjust to changes in the price level
• In the short run the level of Real GDP supplied is directly related to the price level

Long Run Aggregate supply of LRAS marks the level of full employment in economy 

( analogous to the ppc)

Because input prices are COMPLETELY flexible in the long run, changes in price level do not change firms real profits and therefore do not change firm's level of output. This means that the LRAS is vertical at the economy's level of full employment.

Yf, Y*, FE = Full Employment

Changes in SRAS (short run aggregate supply)

  - increase = shift to right

  - decrease = shift to left

Key to understanding shift in SRAS is per unit cost of production

Per unit cost of production = total input cost/ total output

Determinates of SRAS

 1) Input Prices:

 - Domestic Resource Prices - 75% business cost , wages, cost of capitol, raw materials

- Foreign Resource Prices

Aggregate supply intro

- Market power

 Increase in resource prices = SRAS shift to left

  Decrease in resource prices = SRAS shift to Right

Productivity

Productivity = total output/ total input

More Productivity - lower unit production cost = SRAS shift right

Lower Productivity - Higher unit production =SRAS shift to left